Some examples of service companies include lawyers, doctors, consultants, and accountants. Service companies often have simple financial transactions that involve taking customer deposits, billing clients after services have been provided, providing the service, and processing payments. These activities may occur frequently within a company’s accounting cycle and make up a portion of the service company’s operating cycle.

As this journal entry is for the settlement of the $10,000 of credit purchase that the company ABC has made on October 1, both total assets and total liabilities on the balance sheet will decrease by $10,000. If a customer purchases merchandise and is dissatisfied with their purchase, they may receive a refund or a partial refund, depending on the situation. When the customer returns merchandise and receives a full refund, it is considered a sales return. When the customer keeps the defective merchandise and is given a partial refund, it is considered a sales allowance. The biggest difference is that a customer returns merchandise in a sales return and keeps the merchandise in a sales allowance. Since the retailer doesn’t know at the point of sale whether or not the customer will qualify for the sales discount, the entire account receivable of $1,000 is recorded on the retailer’s journal.

Exercise 5 (perpetual) Under the perpetual inventory method, prepare the adjusting entry for inventory if ending merchandise inventory is $101,000 and the physical count of inventory is $96,000. In evaluating the gross and net methods, notice that the Purchase Discounts Lost account (used only with the net method) indicates the total amount of discounts missed during a particular period. The presence of this account draws attention to the fact that discounts are not being taken, frequently an unfavorable situation. The Purchase Discounts account (used only with the gross method) identifies the amount of discounts taken, but does not indicate discounts missed, if any. A business should set up its accounting system to timely process, and take advantage of, all reasonable discounts. In a small business setting, this might entail using a system where invoices are filed for payment to match the discount dates.

Which of these is most important for your financial advisor to have?

When this happens, an accounting transaction is recorded to show the change in the transaction. Both Accounts Payable decreases (debit) and Merchandise Inventory-Printers decreases (credit) by $120 (4 × $30). The purchase was on credit and the allowance occurred before payment, thus decreasing Accounts Payable. Merchandise Inventory decreases due to the loss in value of the merchandise.

• Purchases may include buying of raw materials in the case of a manufacturing concern or finished goods in the case of a retail business.
• Gross Profit is a key measurement for a merchandising business that compares revenue (sales of goods) and the cost of purchasing the goods for re-sale (cost of merchandise sold).
• A retailer typically conducts business with a manufacturer or
  with a supplier who buys from a manufacturer.
• This would reduce the amount of cash the company keeps after the
  sale.

The manufacturer offers the
retailer a 15% discount on the price if they place the order by
September 5. The purchase price would be $4,000 less the 15%
discount of $600, or $3,400. Since the trade discount is based on
when the order was placed and not on any potential payment
discounts, the initial journal entry to record the purchase would
reflect the discounted amount of $3,400.

Comparison of Merchandising Transactions versus Service Transactions

This journal entry is a bit different from the merchandise purchased on credit. Likewise, the journal entry for merchandise purchased under the perpetual inventory system is different from the journal entry for merchandise purchased under the periodic inventory system. There are two kinds of purchase discounts, cash discounts and trade discounts. Cash discount provides a discount on the final price after purchase if a retailer pays within a discount window. On the other hand, a trade discount is a reduction to the advertised manufacturer’s price that occurs during negotiations of a final purchase price before the inventory is purchased.

Under perpetual inventory procedure, the Merchandise Inventory account provides close control by showing the cost of the goods that are supposed to be on hand at any particular time. Budget preparation for merchandising companies
and service companies is similar to budgeting for manufacturing
companies. A service or merchandising company will chart of accounts: definition types and how it works not have a
production budget or direct material budget and may not have a
direct labor or overhead budget. The largest difference is since we
do not have a production or materials purchase budget, we still
need to know how much inventory we need to buy for a merchandiser. The merchandise purchases budget is similar to the production
budget.

Purchase Returns and Allowances Transaction Journal Entries

Merchandise refers to goods a company purchases or produces for selling to customers. It includes tangible products bought, stored, and sold in the operations. Examples of merchandise include finished goods, raw materials, or inventory items a company acquires to resell for a profit. Capital assets are significant pieces of property such as homes, cars, investment properties, stocks, bonds, and even collectibles or art. For businesses, a capital asset is an asset with a useful life longer than a year that is not intended for sale in the regular course of the business’s operation.

What is the Difference Between a Single-step and a Multi-step Income Statement?

Accounts Payable also increases (credit) but the credit terms are a little different than the previous example. These credit terms include a discount opportunity (5/10), meaning, CBS has 10 days from the invoice date to pay on their account to receive a 5% discount on their purchase. Please note that the entire $1,000 account receivable created is eliminated under both payment options. However, when the discount was received by the customer, the retailer received $980, and the remaining $20 is recorded in the sales discount account. Since the customer paid the account in full within the discount qualification period of ten days, the following journal entry on the retailer’s books reflects the payment.

Upon receipt, the customer discovers the plants have been infested with bugs and they send all the plants back. For example, when a shoe store sells 150 pairs of athletic cleats to a local baseball league for $1,500 (cost of $900), the league may pay with cash or credit. If the baseball league elects to pay with cash, the shoe store would debit Cash as part of the sales entry.

1: Adjusting Entries for a Merchandising Company

A purchase return occurs when merchandise is returned and a full refund is issued. A purchase allowance occurs when merchandise is kept and a partial refund is issued. In either case, a manufacturer will issue a debit memo to acknowledge the change in contract terms and the reduction in the amount owed.

On July 6, CBS discovers 15 of the printers are damaged and returns them to the manufacturer for a full refund. Since CBS already paid in full for their purchase, a cash refund of the allowance is issued in the amount of $480 (60 × $8). This increases Cash (debit) and decreases (credit) Merchandise Inventory-Phones because the merchandise is less valuable than before the damage discovery. Accounts Payable decreases (debit) for the original amount owed of $4,020 before any discounts are taken. Since CBS paid on May 10, they made the 10-day window and thus received a discount of 5%. Merchandise Inventory-Tablet Computers decreases (credit) for the amount of the discount ($4,020 × 5%).